Fenil's Library

An average Indian investor is in a tizzy when it comes to choosing investments, because for every spending need of his, there is a plan structured to help him save.

Planning for children’s education as well as other social responsibilities pertaining tochildren are possibly the most urgent requirements of parents. Here too, the Indian investor by and large opts for the traditional options of long-dated fixed deposits, bonds, insurance policies etc. 

Earlier, parents had the comfort of investing in assured-returns plans offering double digit rates of guaranteed return. However, over the past five years, these rates have halved and an efficient ‘assured-returns plan’ is also difficult to come by.

Today, in order to get that extra buffer in returns, one needs to look outside the traditionally offered investment options. Investing in mutual fund plans for a child’s benefit is one way to alleviate the low-interest-rate blues. 

Mutual funds as an investment destination for planning the future of one’s children have been hitherto an underutilised option. For one thing, these plans haven’t received the usual aggressive push by the average financial planner. Nevertheless, these funds offer an efficient and convenient option of investing. 

At the very outset, we need to make a distinction between a child plan offered by an insurance company as against one offered by a mutual fund house. In case of the former, there is a clear insurance cover on the life of either the parent or the child, whereas in case of mutual funds, the insurance cover offered can at times be misleading. 

In most of the schemes, the insurance cover offered is only a personal-accident cover; hence if the insured, i.e. the premium payer, passes away due to natural causes, an insurance claim will yield nothing.

At the same time, there are a handful of schemes that offer life insurance to the applicants. However, the applicant has to make a minimum number of consecutive payments towards the plan. 

Such a life insurance cover may not suffice, as it only exempts the unit holder from further subscription payment and the claims are credited to the beneficiary’s account with restrictions imposed on the amount of claim. Therefore, it is important to gain clarity on the insurance component offered.

At the very basic level, a child plan is very similar to a balanced fund, which has a portfolio of both equity and debt instruments. Therefore, one of the biggest benefits these funds offer is that of automatic rebalancing of the equity and debt components. So if due to market appreciation, the equity component begins to start growing, the fund manager will book profits at systematic levels to ensure an optimum balance. 

A further analysis of this special category reveals that the investment patterns in the funds are not exactly identical for all schemes; they are either equity-oriented or debt-oriented by asset allocation. 

For example, plans such as HDFC Children’s Gift Fund—Investment Plan, ICICI Prudential Child Care Plan—Gift Plan, LIC Children’s Fund, Principal Child Benefit—Career Builder Plan have a larger equity allocation than other child plans. While schemes such as HDFC Children’s Gift Fund—Saving Plan, ICICI Prudential Child Care Plan—Study Plan, SBI Magnum Children Benefit Plan, Tata Young Citizens Fund and a few more can be categorised as debt-oriented as they have invested in the debt segment more aggressively over the past two years.

One can also switch from the equity-oriented to debt-oriented fund as you get closer to your financial goal. For instance, ICICI Prudential offers two separate plans. While the Study Plan is managed as a debt-oriented fund (investing up to 75% in debt and the balance in equity), the Gift Plan is more skewed towards equity (up to 60% in equity and the balance in debt). 

An asset management company (AMC) recommends the Gift option if your child is in the 1-13 years age bracket, while the Study Plan owing to its lower equity exposure, is more suitable if your child is in the 13-17 years age bracket. Similarly, HDFC Mutual Fund, Franklin Templeton Investments and UTI Mutual Fund also offer distinct plans.

First and foremost, these plans are not for the short- or medium-term investor. You ought to look at an investment time horizon of more than 10 years to reap the true benefits of a child plan. 

In case an early redemption is inevitable, you should be mindful of the exit load charged by these plans. The entry load is not a big concern as these are either nil or within 2.25%. Given the long investment horizon, an entry load of even 2.25% will not pinch. Also, in most cases, the exit load is for a period of less than seven years, so if you end up withdrawing your investments after that, you don’t need to worry about the exit load.

Comparing the performance of the two categories, we notice that over the long term, equity-oriented child plans have performed better than their debt counterparts. Specifically, this difference can be seen in HDFC Children’s Gift Fund —Investment Plan (which is equity oriented) and Savings Plan (debt oriented). The difference arises in the asset allocation, which leads to the difference in their returns. 

The investment plan has posted returns of 11.96% from March 2001 till March 26, 2009, while the savings plan has given a return of 9.69% during the same period. Similar has been the case with the ICICI schemes.

Over the more recent period, of course, the debt-oriented schemes have outperformed their peers. Among all the equity-oriented schemes over the past five years, Principal Child Benefit—Career Builder Plan and Future Guard Plan have delivered close to 14% compounded annualised. 

The returns comparison of the schemes also reveals that a high equity allocation doesn’t necessarily lead to better returns. A look at LIC Children’s Plan shows that in spite of maintaining a moderately aggressive portfolio, the scheme has lost much more than its more aggressive counterparts. 

On an average, despite equity allocation of 58% over the past two years, the scheme has lost 33%, much more than ICICI Prudential Child Care—Gift Plan, which has lost 21% over the two-year period on an average equity allocation of 74.94%. 

This brings us back to the often repeated ‘risk profile’ of the investor. But, irrespective of the degree of your risk appetite, the fact remains that preservation of capital is extremely important for parents when they are setting aside funds for their children. In this respect, these funds do not offer capital guarantee. 

In fact, many of them have posted losses over the last one year. A look at the five-year performance should give you a better idea of what sort of returns to expect over the long haul.

Another word of caution: Don’t expect these schemes to deliver superb returns over the short- and medium-term. The risk-reward positioning of these schemes is such it is unlikely that you will see a phenomenal return trail in good times.

Also, to squeeze the maximum benefit, investing early is the key. The earlier you start, the longer your investments have time to grow and greater is the power of compounding. The longer time frame also allows you to choose a more aggressive equity-oriented plan so that one can ride out the volatility. Moreover, the exit load of child plans should help in instilling a discipline and prevent early redemptions.